Gold price up as Fed commits to low rates

Johann Strauss Denkmal Wien. Stock Image.

Gold prices edged higher on Thursday after the US Federal Reserve painted a grim economic outlook and vowed to keep interest rates lower for the foreseeable future.

Earlier in the session, spot gold rose 0.4% to a one-week high of $1,744.60 per ounce, before pulling back to $1,735.05 by noon EST. US Gold futures also rose 1.3% to $1,737.50 per ounce, heading for its biggest gain in more than a month.

Bullion pushed higher late Wednesday following the Fed’s two-day gathering, during which Chairman Jerome Powell said the it is committed to “do whatever we can, for as long as it takes” to help the economy mend from the coronavirus pandemic.

Holdings in gold-backed exchange-traded funds also advanced for the first time in five sessions as growing concerns of a swift economic recovery, as revealed by the Fed, continue to inject support for safe-haven assets.

Almost all officials forecast keeping interest rates near zero through 2022, and the central bank also promised to maintain the current rate of bond purchases

In its updated policy statement and projections, the central bank expects a 6.5% contraction by the end of the year, with the unemployment rate ending at 9.3%, well above its long-run rate forecast of 4.1%.

Consequently, almost all officials forecast keeping interest rates near zero through 2022, and the central bank also promised to maintain the current rate of bond purchases.

“You almost couldn’t come up with a better script for a strong fundamental environment for gold than what we saw from the Fed yesterday,” Matt Weller, global head of market research at Gain Capital Group LLC, said in a telephone interview with Bloomberg.

“It’s really an environment of rampant monetary stimulus, and historically that’s exactly the type of environment in which gold has thrived,” Weller added.

Commodity analysts at TD Securities led by Bart Melek echoed a similar bullish sentiment in a Reuters report:

“Even if things start to improve, we don’t expect the Fed to increase rates at all, so we’re going to be in a very low interest rate environment for the foreseeable future, and that’s positive for gold.”

The possibility of a second wave of coronavirus cases has also upped the appeal of the precious metal, while the ongoing civil unrest adds another level of uncertainty, which may further support gold.

Prior to the Fed meetings, Goldman Sachs forecast bullion would rise to $1,800 an ounce over 12 months and may even go beyond $2,000 if inflation expectations outpace a rise in nominal rates — similar to what happened in the third quarter of 2009.

Dominic Schnider, head of commodities & Asia Pacific currencies at UBS Group AG, told Bloomberg:

“The conditions are here for gold still going to $1,800 with rates staying where they are for longer, and real rates expectations potentially shifting more negative.”

So far this year, price of the metal has risen by over 12%, hitting multiple seven-year highs along the way.

(With files from Bloomberg and Reuters)

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